Do you know if you will owe tax as a shareholder of a company that completes an inversion?
“Inversions” are the subject of Laura Saunders August 1, 2014 article in the Wall Street Journal, “An ‘Inversion’ Deal Could Raise Your Taxes”.
An “inversion” is when a U.S. company merges into a foreign company. Some U.S. companies (e.g. AbbVie, Applied Materials, Auxilium Pharmesuticals, Chiquita Brands International, Medtronic, Mylan, Pfizer, Salix Pharmaceuticals and Walgreen) have considered or are pursuing an “inversion” to reduce U.S. income tax.
It is expected that the “inversion” will be taxable to U.S. shareholders. Technically the U.S. company is being acquired in a taxable transaction. It is unlikely that the shareholders will receive any cash.
The tax consequences will vary based on each shareholder’s specific situation.
The net investment income tax (3.8%) will apply if your adjusted gross income (AGI) exceeds $200,000 if single and $250,000 if married filing jointly.
The long term capital gains rate is 20% if your AGI exceeds $400,000 if single and $450,000 if married filing jointly; 15% if your AGI exceeds $8,950 through $400,000 if single and $17,900 if married filing jointly.
The impact of the alternative minimum tax, itemized deduction phase-out and personal exemption are some of the other factors to consider.
Taxes will not be due if the stock is held in a traditional individual retirement account (IRA), Roth IRA, 401(k), or other tax-deferred vehicles.
Taxes are only on factor to consider, not the controlling factor, in deciding if the stock of a company considering an “inversion” should be bought, sold or held.
“Inversions” will be especially unwelcome for long-term investors who were planning to hold their shares until death for estate-planning purposes. At that point, there is no capital-gains bill, so some shareholders in firms doing “inversions” will owe taxes they would never have had to pay.”
The tax could be reduced if you have any unused losses from prior years.
Selling other stock or investments that have losses is a strategy to reduce tax from the “inversion”.
Gifting the stock to someone in a lower tax bracket (e.g. young child, grandchild, retired parent or grandparent) is another stragey to reduce the tax. The timing of the gift is important.
Contributing the stock to a charity is another approach if you have held the stock for more than a year and will have a gain. The gain will not be taxed and the value of the stock may be deductible as a charitable contribution, subject to limitations. Be sure to get a timely qualified acknowledgment. Allow enough time to complete the transaction before the “inversion”.
Among the other issues to be considered are: gift/estate taxes, “kiddie tax”, and possible retroactive legislation restricting “inversions”.
This is not intended as a complete discussion of all the factors and consequences to consider. You should consult with your personal advisers to determine what if any action is appropriate for you.
Is your portfo as divesified as you think it is?
The following is taken fron an article in the July 2014 issue of Morningstar ETFInvestor. Samuel Lee was the author of the article.
“Most investors understand that they should diversify a lot. However, some hurt themselves by behaving inconsistently. They diversify a lot while implicitly behaving as if they know a lot. A big subset of this group is investors who own lots of different expensive funds. Owning one expensive fund is a high-confidence bet on the manager. Well-done studies estimate that the percentage of truly skilled mutual fund managers is in the low single digits.
It would be strange if your process for assessing mangers turns up lots and lots of skilled ones, because there aren’t many in the first place. (If you see skilled mangers everywhere, chances are your process is broken or not discriminating enough.) It would be even stranger if you bet on many of them. Doing so dooms you to getting index-like results while paying hefty fees. It makes little sense to pay 1% or more of assets on an aggregate portfolio with hundreds of positions and marketlike behavior.
An exception is if you assemble a portfolio of extremely concentrated fund mangers. Owning 10 funds with 10 stocks each put together will look like a moderately concentrated fund manager. This is a model some successful endowments, hedge funds, and mutual funds use.
Most investors should own diversified, low-cost funds. Those who believe they know something should concentrate to the extent that they’re confident in their own abilities. A big dang is that humans are overconfident; many will concentrate when they should be diversified.”
Pay special attention to the above if you think it does not apply to you!
Recent tax rules permit longevity annuities (LAs) to be held in 401(k), IRA, 403(b) and other employer-sponsored individual account plans
A recent press release announcing the final rules explains that, “as boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”
In general, the final rules:
• Amend the required minimum distribution (RMD) rules so payments don’t have to be taken from LAs to satisfy Required Minimum Distribution (RMD) requirements
• Set a maximum investment in an LA to the lesser of 25% of the plan account balance or $125,000 (adjusted for cost-of-living increases)
• Provide individuals with the opportunity to correct inadvertent LA premiums that exceed these limits
• State that the LA must provide that payments begin no later than the first day of the month next following the participant’s 85th birthday, although the maximum age may be adjusted later due to changes in mortality
• Allow for LAs to include “return of premium” death benefit provisions
• Expand the manner in which a contract can be identified as an LA
• Provide that LAs in qualified plans may not include “cash out” provisions, and no withdrawals are permitted in the deferral period, and, unless the optional death benefit or return of premium options are available, no payments will be made if the annuitant dies before the payment start date, although each of these restrictions may be found in LIAs that are not purchased within tax-qualified accounts
• For more information, the final rules can be read here.
Caution: This ruling will most likely have limited applicability. Taxes should not be the primary reason for financial decisions. It is a factor that should be considered after seeing how it impacts your financial plan.
What is a longevity income annuity?
A longevity annuity (LA), also referred to as a deferred income annuity or longevity insurance, is a contract between you and an insurance company. As the insured, you deposit a sum of money (premium) with the company in exchange for a stream of payments to begin at a designated future date (typically at an advanced age, such as age 80) that will last for the rest of your life. The amount of the future payments will depend on a number of factors, including the amount of your premium, your age, your life expectancy, and the time when payments are set to begin.
Caution: Guarantees are subject to the claims-paying ability and financial strength of the annuity issuer.
Reaching Your Goals
Gregory Karp, in his “Spending Smart” column “Money maxims: What dads can tell grads”, June 1, 2014 Chicago Tribune is the incentive for this blog.
Money can be saved or spent. How you handle money will have a significant impact on happiness and future financial well being. Studies relating to finances have increased in the last 15 years. Each year there seem to be more studies. Studies on happiness conclude that people are happier when they spend money on experiences rather than things. Other studies find that most people’s happiness increase as their income increases, up to about $70,000. Studies about retirement have found that the most important thing that anyone can do to reach their retirement living expenses is to save.
Saving is hard to do. Spending must be limited to available income. For most people, living within their income does not mean complete denial. It does require selectivity in the timing and amount of splurges.
Good daily spending habits are important. We have more control over daily spending habits than large items. Minimizing unnecessary and/or unwise expenditures will reduce many items that reduce the amount that can be saved on a regular basis. Most people give larger expenditures, such as homes and cars, significant thought and deliberation. They should also do the same for daily expenditures.
There are also studies that show that we should imagine ourselves in retirement. Aging Booth is an app that will show what you might look like when you age. You may have more incentive to save for that person. Contributing to a 401(k) plans and capturing any employer match may seem more important. Having part of your pay direct deposited to an investment account may also seem like a good way to be kind to the older you.
Necessities and a reserve fund come first. The reserve fund provides a cushion for the frequent unexpected expenditures. Preretirement six months of living expenses is generally recommended. After retirement, a minimum of living expenses after reoccurring income (like social security) for a year is recommended.
The sooner a saving program is started the less required on a periodic basis. To determine how much to save, you need to set financial goals. Your progress should be monitored, at least monthly; more frequently is better. Without knowing the future, your circumstance will change from what you originally projected.
Pipe Dreams
Samuel Lee is an ETF strategist and editor of "Morningstar ETF Investor". His message is very similar to beliefs of many well known and respected individuals such as Jack Bogle, Warren E. Buffett, Larry E. Swedroe and Carl Richards. Researches by firms such as Morningstar, Vanguard and Dalbar have come to the same conclusions.
Investing is a zero-sum activity. If the seller is wrong the buyer is right. If you prefer, if the buyer is wrong, the seller is right. Each believes their decision to buy or sell is correct. Mr. Lee believes that close to 99% who try to beat the market will fail.
Costs are a significant factor in determining who will make money and who will lose money on any transaction. Trading increases cost and reduces the returns.
Mr. Buffett recently indicated his survivors should put their money in index funds and move on. His annual letter to Berkshire shareholders included the following: … "Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting friction costs can be huge and, for investors in aggregate, devoid of benefits. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm."
Warren Buffet is the exception to the rule. He has exceptional skills and access to information and resources not available to most people. Most active mutual funds also do not outperform the market.
John Bogle compares investing to farming. Mr. Bogle compares investing to gardening in his book "Common Sense on Mutual funds. The book references "Chauncey Gardiner" (played by Peter Sellers in the movie) Jerzy Kosinki’s book "Being There". "The seasons of the garden find a parallel in the cycles of the economy and the financial markets, and we can emulate his faith that their patterns …will define their course in the future."
Investing should be based on a plan to achieve your financial goals. It is a long-term process that requires research and patience. Passive investing will improve the returns for most people. Almost everyone believes they are better than most people. The Dalbar studies for the past 25 years are based on real investor returns. Most people think they did better than their actual results.
New Law Offers Special Tax Option for Philippines Relief Donations
Under special legislation enacted last week, taxpayers can choose to treat cash contributions made on or after March 26, 2014, and before midnight on Monday, April 14, 2014, as if made on Dec. 31, 2013. This special provision only applies to charitable cash contributions for the relief of victims of Typhoon Haiyan.
Eligible contributions can be claimed on either a 2013 or 2014 return, but not both. Contributions made after April 14, 2014, but before the end of this year can only be claimed on a 2014 return.
Contributions made by text message, check, credit card or debit card qualify for this special option. Donations charged to a credit card before midnight on April 14, 2014, are eligible contributions even if the credit card bill isn’t paid until after that date. Also, donations made by check are eligible if they are mailed by April 14.
The Philippines Charitable Giving Assistance Act, enacted March 25, 2014, does not apply to contributions of property. Gifts made directly to individual victims are not deductible.
This benefit is only available to an individual that itemize their deductions. The deduction is not available to those that claim the standard deduction.
Contributions must go to qualified charities. Most organizations eligible to receive tax-deductible donations are listed in a searchable online database available on IRS.gov under Exempt Organizations Select Check. Some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov.
Contributions to foreign organizations generally are not deducted. IRS Publication 526, Charitable Contributions, provides information on making contributions to charities.
A record of the name of the charity, the date of the contribution and the amount of the contribution are required for any deductible contribution. Donations by text message, a telephone bill will meet the record keeping requirement. Donations of $250 or more, taxpayers must obtain a written acknowledgment by the charity.
IRS Reverses Long-Standing Position on One-Rollover-per-Year Rule
I discussed a Tax Court case, Bobrow v. Commissioner, in my February 25th blog, “Tax Court Says One Tax-Free Rollover per Year Means just That”. I mentioned that one tax-free rollover per IRA per year was permitted by an IRS publication and proposed regulations. The decision held that a taxpayer may make only one tax-free, 60-day rollover between IRAs within each 12-month period, regardless of how many IRAs an individual maintains.
IRS will not apply this new interpretation to any rollover that involves an IRA distribution occurring before January 1, 2015.
Bobrow v. Commissioner
Mr. Bobrow (anecdotally, a tax lawyer) completed numerous rollovers from various IRAs within 60 days. This was consistent with IRS Publication 590 and the proposed regulations.
The Tax Court relied on its previous rulings, the language of the statute, and the legislative history in deciding this case. The Tax Court held that regardless of how many IRAs an individual maintains, a taxpayer may make only one nontaxable rollover within each 12-month period.
The IRS response
The IRS, in Announcement 2014-15, indicated that it will follow the Tax Court’s Bobrow decision, and apply the one-rollover-per-year rule on an aggregate basis, instead of separately to each IRA you own. However, in order to give IRA trustees and custodians time to make changes in their IRA rollover procedures and disclosure documents, the IRS will not apply this new interpretation to any rollover that involves an IRA distribution that occurs before January 1, 2015.
What this means to you
For the rest of 2014 the “old” one-rollover-per-year rule in IRS Publication 590 (see above) will apply to any IRA distributions you receive. So if you have a need to use 60-day rollovers to move funds between IRAs, you have only a limited time to do so without regard to the new Bobrow interpretation.
You can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule. So if you don’t have a need to actually use the cash for some period of time, it’s generally safer to use the direct transfer approach, and avoid this potential problem altogether. The tax consequences of making a mistake can be significant, so don’t hesitate to consult a qualified professional before making multiple rollovers.
*Note: The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as rollovers for this purpose.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.
What priority do you place on your retirement?
The New York Times Feb. 28, 2014 article, “Save for Retirement First, the Children’s Education Second”, applies to other financial goals also. Two critical financial planning steps are to identify your financial goals and determine the priority of each. The cost of each goal and when you want to achieve the goal are also needed.
One objective in financial planning is to determine how much is needed to achieve your goals. Saving is almost always the way to have the funds needed. The longer you wait to start to save for financial goals, the harder it is to achieve. That is because more needs to be saved each year.
The challenge to be able to save for retirement becomes more difficult as the number of goals increase. You can borrow for some goals. Borrowing for retirement is generally not an alternative. Financing goals before retirement may decrease the ability to borrow in the future and increases future cash needs.
Children’s education, helping a child with the purchase of a home, helping children with their loans could reduce the amounts needed to maintain a comfortable retirement.
Possibly the expenses can be reduced. Attending local and in-state colleges are generally less expensive than private colleges. Having the children take out student loans also reduces the amount the parents will have to pay.
Contributing less into qualified retirement plans, including IRAs, (Plans) and borrowing from Plans reduces the amount that can be saved for retirement. Contributing to Plans allows the funds to grow free of annual income tax. This allows the income and growth to grow faster in Plans. Borrowing from a Plan reduces the potential return on the amount in the Plan. If the interest rate charged by the Plan is less than the amount a financial institution would charge, the amount of income in the Plan will be reduced.
A reserve account for the unexpected and emergencies should be given a very high priority. Without reserves, these types of expenditures could require the liquidation of investment when their values are low.
There are unintended consequences of not saving for retirement first. Your children may need to support their parents in retirement. A child may need to give up a job to care for a parent if the funds are not available for health care.
Set your priorities for yourself first. Any excess can be left to your heirs.
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Tax Court Says One Tax-Free Rollover per Year Means Just That
| Background The Internal Revenue Code says that if you receive a distribution from an IRA, you can’t make a tax-free (60-day) rollover into another IRA if you’ve already completed a tax-free rollover within the previous 12 months. The long-standing position of the IRS, reflected in Publication 590 and proposed regulations, is that this rule applies separately to each IRA you own. Publication 590 provides the following example: “You have two traditional IRAs*, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.” Very clear. Clear, that is, until earlier this year, when the Tax Court considered the one-rollover-per-year-rule in the case of Bobrow v. Commissioner. Bobrow v. Commissioner On April 14, 2008, he withdrew $65,064 from IRA #1. On June 10, 2008, he repaid the full amount into IRA #1. On June 6, 2008, he withdrew $65,064 from IRA #2. On August 4, 2008, he repaid the full amount into IRA #2. Mr. Bobrow completed each rollover within 60 days. He made only one rollover from each IRA. So, according to Publication 590 and the proposed regulations, this should have been perfectly fine. However, the IRS served Mr. Bobrow with a tax deficiency notice, and the case went to the Tax Court. The IRS argued to the Court that Mr. Bobrow violated the one-rollover-per-year rule. The Tax Court agreed with the IRS, relying on its previous rulings, the language of the statute, and the legislative history. The Court held that regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover within each 12-month period. “Taxpayers may rely on a proposed regulation, although they are not required to do so. Examiners, however, should follow proposed regulations, unless the proposed regulation is in conflict with an existing final or temporary regulation (Internal Revenue Manual 4.10.7 issue resolution). “IRS Publications explain the law in plain language for taxpayers and their advisors. They typically highlight changes in the law, provide examples illustrating Service positions, and include worksheets. Publications are nonbinding on the Service and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position” (Internal Revenue Manual 4.10.7 issue resolution). This maybe why neither the IRS nor Mr. Bobrow appears to have cited the Service’s long-standing contrary position in Publication 590 and the proposed regulations. So what’s the rule now? And don’t forget–you can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule. *The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as a rollover for this purpose.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources. |
Privacy Breaches
Two recent articles discuss privacy breaches.
“Sidestepping the Risk of a Privacy Breach”, posted by the nytimes.com February 7, 2014, discussed the security of personal data when using “plastic”. A representative of the American Bankers Association expressed concern that criminals seem to be ahead of the marketplace, the regulators and the consumers.
Starting in 2005, there have been 4.167 known breaches that exposed 663,587,386 records of personal information. Recent headlines have revealed continuing breaches at some very large and sophisticated entities.
Over 30% of people whose information was breached in 2013 became victims of some kind of identity theft. That is an increase from about 12% three years ago.
Emails are increasingly exposing us to the threat of breaches to our privacy. If you receive an email asking for personal information and there is anything that raises concern, go to the website and call the entity. If there is a known breach, it may be on the website or the representative of the entity can tell you if it is legitimate.
“Leading a cash-only life is a theoretical possibility, but it boxes you out of most online shopping and makes traveling difficult. Going cash-only mostly means endless trips to the A.T.M. and all the fees and hassle that come with it”.
“With the right tactics, however, it’s easy enough for most people to greatly bolster their odds of avoiding the worst of the problems.”
Gregory Karp’s article “Think before buying ID theft protection” was in The Chicago Tribune Feb. 9, 2014.
He believes that you probably should not subscribe to identify “protection” services, “if your only concern is a thief fraudulently using your payment card information. Typically, that’s not a big deal, and you won’t lose any money. ”
A representative from the Identity Theft Resource Center was quoted: “You can’t make the blanket statement that all of these services are bad or not worth your while.” A representative of the Privacy Rights Clearinghouse indicated the services have “dubious value. It’s fairly expensive, and there are other ways you can protect yourself.”
He noted that Consumer Reports had the following on their website: “Don’t get fleeced by identity-theft protections services.” Gregory noted that some felt the claim of “prevention” and “protection” are exaggerations. The benefit of these services is that they provide more timely alerts to a breach.
If you are thinking of getting this type of service learn exactly what you get. You need to educate yourself and follow through if you do not get this type of service.
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